Mortgage Banking Update
In this issue:
- FTC Launches Dedicated Fintech Web Page
- This Week’s Podcast: A Close Look at the Changes to the CFPB’s Civil Investigative Demand Policies
- Congress Again Temporarily Extends National Flood Insurance Program
- Congress Passes Six-Month Extension of National Flood Insurance Program
- CFPB Updates TRID Rule FAQs to Address Construction Loans
- Kraninger Sets Tone for Vigorous Enforcement Agenda in Decisions on Five Petitions to Modify or Set Aside CFPB CIDs
- Wyoming Creates Fintech Sandbox
- This Week’s Podcast: OCC Fintech Charter: Assessing the Opposition and Looking Ahead to Possible Next Steps for the OCC
- HMDA Proposed Rule Comment Period
- Did You Know?
- Looking Ahead
The FTC has launched a dedicated Fintech page on its website where it has assembled Fintech-related materials.
The materials that can be accessed on the new page include Guidance (which consists of various FTC publications), Videos (which include excerpts from FTC workshops), Related Posts (which address ongoing FTC developments), and Legal Resources (which include staff reports and filings in enforcement actions).
In this podcast, we discuss the recently announced changes to the CID policies of the Consumer Financial Services Bureau (CFPB), how those changes reflect recent court decisions, and the practical implications of the changes (including their utility to companies in responding to CIDs).
Click here to listen to the podcast.
Congress has once again temporarily extended the National Flood Insurance Program. As previously reported, at the end of 2018 Congress temporarily extended the Program until May 31, 2019. The recent legislation (S.1693) extends the Program to June 14, 2019. The temporary extension provides time for the House of Representatives to vote on H.R. 2157, which was passed by the Senate with an amendment. The bill would extend the Program until September 30, 2019.
On June 3, 2019, the U.S. House of Representatives approved H.R. 2157, which provides for aid to address the consequences of various natural disasters and also includes an extension of the National Flood Insurance Program (NFIP) until September 30, 2019. The Senate previously approved the bill. According to news reports, President Trump will sign the bill into law.
As previously reported, Congress recently approved an extension of the NFIP from May 31, 2019, to June 14, 2019, in order to provide time for the House to vote on H.R. 2157.
The CFPB recently updated the TILA/RESPA Integrated Disclosure (TRID) rule FAQs to address construction loans. The guidance falls well short of what the industry is seeking from the CFPB.
Because of the lack of guidance from the CFPB on how to disclose construction loans under the TRID rule, the industry asked Congress to intervene. As previously reported, the Economic Growth, Regulatory Relief, and Consumer Protection Act includes a provision that it is the sense of Congress that the CFPB should endeavor to provide clearer, authoritative guidance on the applicability of the TRID rule to construction-to-permanent loans and the conditions under which such loans can be properly originated.
Rather than provide detailed guidance on the completion of the Loan Estimate and Closing Disclosure for construction-only loans and construction-to-permanent loans, in two FAQs the CFPB simply addresses basic issues already well understood by the industry.
In one FAQ, the CFPB simply confirms that the TRID rule applies to most construction-only and construction-to-permanent loans. In the other FAQ, the CFPB simply confirms the existence of certain Regulation Z provisions that address construction loans. The provisions are (1) section 1026.17(c)(6), which provides for the ability of a creditor to treat a construction-to-permanent loan as one or multiple transactions, (2) Appendix D, which provides guidance on how to calculate certain disclosures with construction loans, and (3) section 1026.19(e)(3)(iv)(F), which permits a creditor to issue a revised Loan Estimate with a loan on new construction when settlement is expected to occur more than 60 days after the original Loan Estimate is provided.
If the CFPB is unwilling or unable to provide definitive guidance on how to complete the Loan Estimate and Closing Disclosure for construction-only loans and construction-to-permanent loans, including providing sample completed disclosures, it should reconsider whether the TRID rule should apply to such loans.
Consumer advocates have heavily criticized CFPB Director Kraninger and former Acting Director Mick Mulvaney for taking a much less aggressive attitude toward enforcement than former Director Cordray. While there are fewer lawsuits and consent orders under the Kraninger/Mulvaney leadership than under the Cordray leadership, the CFPB’s enforcement activities are still quite robust, as exemplified by the five decisions and orders issued by Director Kraninger on April 25 in which she, with minor changes, strictly enforced five separate CFPB CIDs. These decisions and orders largely flew under the radar until Jeff Ehrlich, CFPB Deputy Enforcement Director, mentioned them on May 20 in Chicago when he spoke at the PLI 24th Annual Consumer Financial Services Institute, which I co-chaired.
On April 23, the CFPB announced that in an effort to provide more transparency to CID recipients, it would provide more specific information in CID notifications of purpose. Director Kraninger’s April 25 decisions and orders granted those petitions to modify or set aside the CIDs that included a challenge to the sufficiency of the CIDs’ notification of purpose but only as to that challenge (Her decisions and orders modify the notifications consistent with the Bureau’s April 23 announcement). However, Director Kraninger denied those petitions as to all other challenges and fully denied the petitions that did not include such a challenge.
The five decisions and orders consist of the following:
- The CID’s original notification of purpose stated that the CID had been issued “to determine whether small-dollar lenders or other persons (1) in connection with the advertising, marketing, offering, provision, servicing, documentation or collection of loan applications or loans, have engaged in unfair, deceptive or abusive acts or practices in violation of [the CFPA] or have violated the [ECOA] or the [FCRA], or (2) in connection with maintaining records or providing information for a Bureau examination, have violated [section 1036 of the CFPA].”
- The modified notification states that the purpose of the investigation “is to determine whether small-dollar lenders or associated persons, in connection with extending or servicing small-dollar loans or collecting debts, have (1) made harassing debt-collection calls to consumers’ workplaces in a manner that is unfair, deceptive, or abusive in violation of [the CFPA] (2) failed to maintain and preserve records in a manner that violates [Reg. B, principally section 1002.12]; (3) failed to follow the requirements for providing disclosures to consumers in a manner that violates the [FCRA, principally sections 1681g, 1681m]; or (4) failed to maintain records or failed to provide information to the Bureau in connection with a Bureau examination in a manner that violates Section 1036(a)(2) of the CFPA.”
- Prior to the issuance of the CID, a Bureau enforcement attorney sent direct messages to Fastbucks’ owner via social media that primarily concerned a state enforcement action against Fastbucks that the enforcement attorney worked on prior to his Bureau employment when he was employed by the state’s Attorney General’s office. Even though the attorney did not work on the Bureau’s investigation of Fastbucks, the company argued that the messages, which it characterized as harassing and taunting, showed that the CID was issued for an improper purpose. Director Kraninger rejected this argument, stating that the CIDs “have been subject to multiple levels of review within the Bureau … that have ensured they were issued for a proper purpose and in accordance with all applicable regulations.”
- Even though Fastbucks had not challenged the sufficiency of the CID’s notification of purpose, Director Kraninger modified the notification as set forth above.
- The CID’s original notification of purpose stated that the CID had been issued “to determine whether persons that purport to acquire the rights to veterans’ military pensions or other benefits in exchange for lump-sums are offering to extend credit or extending credit. The purpose of this investigation is also to determine whether, in connection with the offering or collecting on these products, such persons have engaged in unfair, deceptive, or abusive acts or practices in violation of [sections 1031 and 1036 of the CFPA].”
- The modified notification states that the purpose of the investigation “is to determine whether persons that purport to acquire the rights to veterans’ military pensions or other benefits in exchange for lump-sums are offering to extend credit or extending credit. The purpose of this investigation is also to determine whether such persons, in connection with the offering or collecting on these products, have made false or misleading representations to consumers or have failed to disclose to consumers the applicable interest rate on the credit offer, in a manner that is unfair, deceptive, or abusive in violations of Sections 1031 and 1036 of the [CFPA].”
- Director Kraninger rejected the petitioners’ argument that the CIDs should be set aside because the CFPB is unconstitutional, stating that the “Bureau has consistently maintained that its statutory structure is constitutional under controlling Supreme Court precedents.” She also rejected their argument that because they are attorneys, the CIDs should be modified to protect attorney-client privileged information and attorney work product. She concluded that modification of the CIDs was unnecessary because “the CFPA and the Bureau’s rules already provide an orderly procedure for asserting privilege during the giving of oral testimony in response to a CID.” Director Kraninger stated that while the petitioners “are entitled to raise appropriate privilege objections while testifying, in conformance with the procedures provided by the CFPA and the Bureau’s rules, their premature assertion of privilege provides no grounds for setting aside the CID itself.”
- Ms. Plummer, who worked in an administrative support position for petitioners Kern-Fuller and Sutter, received a CID with the same original notification of purpose as the CIDs received by those petitioners. Even though Ms. Plummer had not challenged the sufficiency of the notification of purpose, the decision and order denying her petition modified the notification in the same manner as the notification in the Kern-Fuller/Sutter CIDs.
- Director Kraninger rejected Ms. Plummer’s argument that the petition should be set aside because it exceeded the Bureau’s authority over the practice of law and because it improperly sought attorney-client privileged information and attorney work product. She found that Ms. Plummer’s first argument ignored language in the CFPA that a person whose activities are otherwise excluded from the CFPB’s supervisory and enforcement authority can still be subject to requests to CIDs issued by the Bureau “in the course of carrying out its responsibilities to enforce the federal consumer financial laws.” Ms. Plummer’s second argument was rejected on the same grounds as the similar argument made by petitioners Kern-Fuller and Sutter.
- The CID’s original notification of purpose stated that the CID had been issued “to determine whether debt collectors or other unnamed persons have engaged in, or are engaging in, unlawful acts or practices in connection with the collection and reporting of consumer debts in violation of the [FDCPA], the [FCRA], [the regulations concerning the Duties of Furnishers of Information to Consumer Reporting Agencies], or any other federal consumer financial law.”
- The modified notification states that the purpose of the investigation “is to determine whether debt collectors or associated persons, in connection with the collection and reporting of consumer debts, have: (1) made false or misleading representations in a manner that violates the [FDCPA], principally section 1692e; (2) failed to perform the duties of a furnisher of information to consumer reporting agencies, including by failing to establish reasonable policies and procedures concerning the accuracy and integrity of furnished information or to conduct appropriate investigations of disputes, in a manner that violates the [FCRA], principally section 1681s-2, or [Reg. V], principally Subpart E; or (3) thereby also violated Section 1036(a)(2) of the [CFPA].”
- Director Kraninger rejected the petitioner’s argument that the petition should be set aside for the same reason as set forth in her decision and order regarding petitioners Kern-Fuller and Sutter. She also rejected the petitioner’s argument that the Bureau’s overall investigation had been fundamentally unfair because it did not have enough time to comply with past CIDs, the Bureau’s document submission standards were overly demanding, and the CIDs were issued after Enforcement had indicated that the petitioner could be the subject of a public enforcement action and after discussing the possibility of settlement. With regard to the last argument, Director Kraninger stated that the petitioner had not shown that the CID was issued for an improper purpose or in bad faith because it had failed to provide “any statutory or other restriction on the Bureau’s ability to issue a CID after an enforcement action is authorized but not filed” or to “explain why it would be improper for the Bureau to issue a CID to obtain additional evidence before authorizing an enforcement action.”
- The CID’s original notification of purpose stated that the CID had been issued “to determine whether student loan debt-relief providers, mortgage lenders, or other persons, in connection with obtaining, using, or disclosing consumer information or with marketing or selling products and services relating to student loan consolidations, repayment plans, and forgiveness plans, have engaged in unfair, deceptive, or abusive acts or practices in violation of sections 1031 and 1036 of the [CFPA]; or have violated the [FCRA] or the Telemarketing Sales Rule.”
- The modified notification states that the purpose of the investigation “is to determine whether student loan debt-relief providers, mortgage originators, or associated persons, in connection with obtaining, using, or disclosing consumer information or with marketing or selling products and services relating to student loan consolidations, repayment plans, and forgiveness plans, have: made false or misleading representations to consumers in a manner that is unfair, deceptive, or abusive in violation of sections 1031 and 1036 of the [CFPA]; or have obtained or used consumer reports without a permissible purpose in a manner that violates the [FCRA]; or have made false or misleading representations to consumers or requested or received prohibited payments from consumers in a manner that violates the Telemarketing Sales Rule.”
- Director Kraninger denied Mr. Nesheiwat’s request for the redaction of his name from all public materials concerning his petition because he had failed to “articulate any argument why his name would be protected from disclosure under FOIA,” and had not “clearly identif[ied] any harm he would suffer from disclosure.”
Earlier this year, Wyoming became the second state to create a Fintech sandbox by enacting the Financial Technology Sandbox Act (Sandbox Act) (Arizona was the first state to create a Fintech sandbox, and we will soon be publishing a blog post about Utah’s new Fintech sandbox). The provisions requiring Wyoming’s Banking Commissioner and Secretary of State to adopt implementing regulations became effective on February 19, 2019. The remainder of the Sandbox Act is effective January 1, 2020.
The Sandbox Act authorizes the Banking Commissioner or Secretary of State to grant a waiver for a “sandbox period” from the statutes specified in the Sandbox Act (and their implementing rules) to “a person who makes an innovative financial product or service available to consumers in the financial technology sandbox if [such specified statutes] or rules do not currently permit the product or service to be made available to consumers.” Key definitions include the following:
- “Financial product or service” means “a product or service related to finance, including banking, securities, consumer credit or money transmission, which is subject to statutory or rule requirements [that may be waived under the Sandbox Act] and is under the jurisdiction of the commissioner or secretary.”
- “Financial technology sandbox” means “the program created by [the Sandbox Act] which allows a person to make an innovative financial product or service available to consumers during a sandbox period through a waiver of existing statutory and rule requirements, or portions thereof, by the commissioner or secretary.”
- “Innovative” means “new or emerging technology, or new uses of existing technology, that provides a product, service, business mode or delivery mechanism to the public and has no substantially comparable, widely available analogue in Wyoming, including blockchain technology.”
- “Sandbox period” means “the period of time, initially not longer than twenty-four (24) months, in which the commissioner or secretary has authorized an innovative financial product or service to be made available to consumers, which shall also encompass any extension granted under [the Sandbox Act].”
The Wyoming statutes and rules that may be waived pursuant to the Sandbox Act include the Uniform Consumer Credit Code, the Uniform Electronic Transactions Act, the Money Transmitters Act, and the Residential Mortgage Practices Act. Thus, unlike Arizona’s sandbox, a person receiving a waiver under the Sandbox Act can be exempted from Wyoming’s civil usury laws. A person receiving a waiver under the Sandbox Act remains “subject to all criminal and consumer protection laws,” including the Consumer Protection Act, which prohibits deceptive and other practices.
The Sandbox Act allows the Banking Commissioner or Secretary of State, on a case by case basis, “to specify the maximum number of consumers permitted to receive an innovative product or service” after consulting with a person whose “financial technology sandbox application” has been approved. It also requires a person whose sandbox application has been approved to provide a written statement to a consumer containing specified information “before a consumer purchases or enters into an agreement to receive an innovative financial product or service through the financial technology sandbox.”
Opposition from state regulators to the OCC’s decision to issue special purpose national bank (or Fintech) charters continues to be vigorous. In this podcast, we review the charter’s potential benefits, assess the legal arguments made by its opponents, discuss the federal court decision refusing to dismiss the New York banking regulator’s lawsuit, why we think it’s incorrect, and possible next steps for the OCC and look at Fintech charter alternatives.
Click here to listen to the podcast.
As previously reported, in May 2019 the CFPB issued both a proposed rule to modify the existing Home Mortgage Disclosure Act (HMDA) rule and an advance notice of proposed rulemaking seeking comment on additional potential changes to the rule. The drafts of the items indicate a 30-day comment period for the proposed rule and a 60-day comment period for the advance notice of proposed rulemaking. However, the Federal Register version of the proposed rule, which was published on May 13, 2019, indicates that comments are due by July 12, 2019, which is a 60-day comment period. The advance notice of proposed rulemaking appears in the May 8, 2019, Federal Register, and comments are due by July 8, 2019.
CSBS Publishes New Series: “Reengineering Nonbank Supervision”
In a press release noting, among other things, that “[n]onbank mortgage companies are responsible for two-thirds of annual residential mortgage originations, more than doubling their market share since 2013,” The Conference of State Bank Supervisors (CSBS) on June 7 published the first chapter in a series designed to examine ways to improve the supervision of the nonbank financial services industry, including mortgage. In its opening chapter, CSBS described the role of mortgage loan originators, mortgage lenders, mortgage servicers, and market conditions. In CSBS’s words:
“The goal of this opening chapter … is to provide a high-level overview of multiple participants composing the nonbank industry and provide a sense of not only the complexities of such a diverse marketplace, but also the vital role this industry plays in almost every aspect of consumer’s financial needs. In forthcoming chapters, CSBS will delve deeper into the underpinnings and history of the industry, including the need participants fulfilled and the challenges they met. We will also discuss the benefits and future of each participant and state supervision specific to that business type. CSBS will also publish papers covering the state nonbank system of supervision and how the system interfaces with other systems of supervision, enforcement and market controls. The final chapter in the paper will address challenges and opportunities for the state system and provide a roadmap for ‘reengineering’ state nonbank supervision.”
The chapter is CSBS staff-developed under the direction of the CSBS Non-Depository Supervisory Committee and is available at: https://www.csbs.org/csbs-white-paper-reengineering-nonbank-supervision
California MBA Mortgage Quality and Compliance Webinar | June 19, 2019, 2:00 p.m.
Speaker: Richard J. Andreano, Jr.
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